In a joint proposal between the Bank of England and the Treasury, banks will receive cut-price funds provided they pass on the benefits to their business customers.

This new "funding for lending" scheme could provide an £80bn boost to loans to the private sector within weeks and alleviate growing fears of a second slump since the start of the financial crisis in 2007.

In a second scheme the Bank will begin pumping a minimum of £5bn a month within the next few days into City institutions to improve their liquidity.

With one Spanish minister warning that the future of Europe could be decided within hours, both the governor and the chancellor used the backdrop of another day of financial and economic turbulence in the eurozone to express deep concern about the threat to Britain posed by Europe.

As interest rates on Spain's 10-year borrowing hit the 7% level and Angela Merkel insisted she was running out of patience with her fellow eurozone policymakers, King told a City audience at the Mansion House, London, that there was a "large black cloud of uncertainty hanging over not only the euro area but our economy too, and indeed the world economy as a whole".

Osborne said things were likely to get worse in the eurozone before they got better and insisted that the time for decisions had come. Strongly defending the government's handling of the economy, the chancellor said it had been the hard-won credibility built up over the past two years that had allowed the Treasury and the Bank to take action.

Thursday night's announcements were designed to shore up confidence before this weekend's elections in Greece, seen as a possible trigger point for a new phase in Europe's debt crisis.

In a speech to parliament in Berlin presaging a fortnight of crucial elections and summitry in Europe, an exasperated Merkel bluntly told the rest of Europe to get real about the crisis, dismissed calls for Berlin to share responsibility for other euro countries' debt, and rejected charges that Germany was not doing enough to stabilise the euro.

"Germany's strength is not unlimited," Merkel warned. "The way out of the crisis in the eurozone can only be successful if all countries are capable of recognising the reality and realistically assessing their strengths."

Merkel's uncompromising remarks came as Spain's foreign minister, José Manuel García Margallo, said: "The future of the European Union will be played out in the next few days, perhaps in the coming hours."

According to a report in the Spanish newspaper El País, García Margallo said: "The three months that [IMF boss Christine] Lagarde gave is possibly too long."

García Margallo called on the European Central Bank to buy Spanish bonds, and there was market speculation that the central bank had stepped in as the yield on the 10-year bond fell back below the 7% mark that had sent alarm bells ringing in the financial markets. In a dig at Germany, he added: "If the Titanic sinks, it takes everyone with it, even those travelling in first class."

Merkel expects to come under pressure when the G20 group of developed and developing countries meets for its summit in Mexico on Monday.

"Once again Germany will be the centre of attention," the German chancellor said, adding that some of the formulas being proposed for saving the euro using German money would simply amount to illusory short-lived fixes condemning Europe to a future of high debt and economic mediocrity.

Spanish government sources said the European council president, Herman Van Rompuy was due to meet Spanish prime minister Mariano Rajoy, Merkel, Italy's Mario Monti and French president François Hollande at the G20. Barack Obama, who has been pressing eurozone countries to act quickly to sort out the debt crisis, was also expected to meet the five eurozone leaders in Mexico. David Cameron may also join the meeting.

King raised the prospect on Thursday night that the eurozone would not emerge from the crisis intact. Noting that funding costs for UK banks were already going up as a result of the problems faced by the weaker nations of monetary union, the governor said: "Any significant redenomination of their currencies, or a default on domestic debts, would, both directly and as a result of the consequences for all our economies, put a dent in the capital position of our banks. As a result, investors demand a higher risk premium on loans to banks, pushing up the cost of borrowing for homeowners and businesses."

Underlining his concern about the pressures on UK financial institutions, the governor said Threadneedle Street would provide as much cash as banks required "given the turbulence ahead".

Osborne said the Bank and the Treasury were taking co-ordinated action to inject new confidence into the financial system and support the flow of credit to the real economy.

"We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend our economy from the crisis on our doorstep. The government, with the help of the Bank of England, will not stand on the sidelines and do nothing as the storm gathers."